Wednesday, July 08, 2009

Global Financial Crisis, Mortgage Tsunami, Housing Bubble Can All Be Traced to Federal Government Intervention to Create Affordable Housing

Excerpts from "The Role of Government Affordable Housing Policy in Creating the Global Financial Crisis of 2008," a 26-page report released yesterday by the U.S. House of Representatives Committee on Oversight and Government Reform:

The housing bubble that burst in 2007 and led to a financial crisis can be traced back to federal government intervention in the U.S. housing market intended to help provide homeownership opportunities for more Americans. This intervention began with two government-backed corporations, Fannie Mae and Freddie Mac, which privatized their profits but socialized their risks, creating powerful incentives for them to act recklessly and exposing taxpayers to tremendous losses. Government intervention also created “affordable” but dangerous lending policies which encouraged lower down payments, looser underwriting standards and higher leverage.

Finally, government intervention created a nexus of vested interests – politicians, lenders and lobbyists – who profited from the “affordable” housing market and acted to kill reforms. In the short run, this government intervention was successful in its stated goal – raising the national homeownership rate. However, the ultimate effect was to create a mortgage tsunami that wrought devastation on the American people and economy. While government intervention was not the sole cause of the financial crisis, its role was significant and has received too little attention.

The real tragedy of the government’s affordable housing policy is the impact on average Americans, particularly those of modest means. Millions of these borrowers, who were supposed to have been helped by federal affordable housing policy, have now been forced into delinquency and foreclosure, destroying their asset base, their credit, and in some cases their families. For example, Latino homeowners, who once appeared to be among the most frequent beneficiaries of affordable housing policies, are now the victims of the policies that their political representatives in Washington once championed.

The consequences of these policies have also brought the entire global financial system to the brink of collapse, destroying trillions in equity and untold numbers of lives. It is essential to reexamine the borrow-and-spend, high-leverage policies that became prevalent in the mortgage market as a result of well-intentioned-but-reckless decisions made by elected officials on behalf of the American people.


Washington must reexamine its politically expedient but irresponsible approach to encouraging higher levels of homeownership based on imprudently small down payments and too little emphasis on borrowers’ creditworthiness and ability to repay their loans. Without such a return to fiscal discipline and responsibility, we will continue making the same mistakes that led us to the current financial crisis.

HT: Tom Sullivan

22 Comments:

At 7/08/2009 5:20 PM, Anonymous Benny The Libertarian said...

Especially the mortgage interest tax deduction.
Let's kill that first.
Then, wipe out FNMA, GNMA. Also, kill the FDIC.
The free market rules.

 
At 7/08/2009 5:41 PM, Anonymous Anonymous said...

I suspect that the real source of the government's intervention to create affordable housing comes from the nonprofit sector - in the form of pressure for the government to "do something" to increase home ownership among those of lower incomes.

There are basically many guilty parties relating to the current crisis. I don't recall the nonprofit sector being one of them. Any hints on who these might be?

 
At 7/08/2009 6:02 PM, Blogger 1 said...

"Especially the mortgage interest tax deduction.
Let's kill that first.
Then, wipe out FNMA, GNMA. Also, kill the FDIC.
The free market rules.
"...

Got get rid of the Dems first...

The Dems are either pathologically dishonest or to dumb to be in the Congress, take your pick...

 
At 7/08/2009 6:10 PM, Anonymous Benny The Free Marketeer said...

The Dems, The Repubs...you can tell the difference?
Who supports the Dep't of Agriculture and the Pentagon? Radically reduce those relics from the Great Depression and the old War, and you trim $700 bil from the federal budget.
Then wipe out HUD, Dept of Education, and Commerce, and Labor.

 
At 7/08/2009 6:14 PM, Anonymous Glenn Jericho said...

This doesn't pertain to the article, but I just wanted to say that I love your site and I read it nearly every day. Always something interesting and informative.

 
At 7/08/2009 7:08 PM, Blogger 1 said...

"Who supports the Dep't of Agriculture and the Pentagon? Radically reduce those relics from the Great Depression and the old War, and you trim $700 bil from the federal budget.
Then wipe out HUD, Dept of Education, and Commerce, and Labor
"...

After you read this document you'll see that something like 70+ cents on the dollar when it comes to federal income tax (page 38) is paying for constitutionally questionable nonsense...

 
At 7/08/2009 8:46 PM, Blogger Robert Miller said...

This comment has been removed by the author.

 
At 7/08/2009 9:50 PM, Anonymous Anonymous said...

Government policies cause misallocation of capital. So, what else is new?

 
At 7/08/2009 10:34 PM, Blogger Dave said...

This report only claims to be a Staff report with only one congress members name on it, Darrell Issa (CA-49).

I agree with the findings but someone not so inclined would hardly think these opinions authoritative.

 
At 7/08/2009 11:34 PM, Anonymous Benny The Real Libertarian said...

I doubt house prices will sink much more in SoCal. You have nice houses already selling for $300 a sf. They are becoming affordable.
Money pours into SoCal from all over the world. You know how much US cash is in circ globally? Greenbacks are out there, get laundered somehow, and come back to L.A. One guy offered me cash for my factory in L.A. We are talking suitcase money.
Maybe Detroit is the future for L.A., but I think not. Too many people want to live here.
A cheap dollar would help. Maybe USA will become an exporting nation again. Our manufacturing labor is already cheaper than Europe's or Japan's. In one more generation, our labor will be cheaper than China's---they will buy from us, probably good in factories in SoCal.
With 1.2 billion people, a mercantile-fascist government, and the Chinese work ethic and culture, China will simply swamp US influence globally. Our military is a useless ornament against the money they have. We are stupidly fighting the wrong wars--jeez cricky, $1 trillion down the shithole named Iraq. Now the new idiot Obama has us in Afghanie and Pakistan. No doubt we will spend another trillion dollars to prove some point--that we are jackanape idiots, that is the point.
Meanwhile, China is building nuke plants, coal plants, coal-to-liquid plants, steel mills, everything you can think of. They are building cars, they are planting jatropha, there is hardly anything they are not doing. Except wasting money on useless military expeditions to nowhere.

 
At 7/09/2009 1:58 AM, Blogger Lorenzo said...

Have not read the report, but housing prices in places which allowed landowners to respond to housing demand (e.g. Texas) did not have housing bubbles. It seems to me that the US federal policies aggravated the bubbles and, more importantly, increased the systemic risk in the financial system.

 
At 7/09/2009 6:15 AM, Blogger 1 said...

Well here in Missouri around the St. Louis area there hasn't been much of a bubble bursting problem with regard to housing...

California though is another story though...

Lets face facts, what's driving a lot of California's problems are its clueless resident moonbats...

Until that little problem is rectified how will California clean up its problems?

 
At 7/09/2009 10:04 AM, Blogger OBloodyHell said...

> Got get rid of the Dems first...

Can I be the one to "push the button"???

Can I, please?

Oh, pleeease?


Pretty pleease???

Pleeeeeeeeaaaassseeeee???

 
At 7/09/2009 10:05 AM, Blogger OBloodyHell said...

> Then wipe out HUD, Dept of Education, and Commerce, and Labor.

With adequate military force and complete surprise, this tactic might even work.

 
At 7/09/2009 10:17 AM, Blogger OBloodyHell said...

Benny, you need to grasp something before talking on this subject.

WE ARE NO LONGER A MANUFACTURING NATION FOR A REASON.

When they spoke of a "post-industrial economy" in the 60s and 70s, they could see the writing on the wall -- any future economic growth would not come from industry, manufacturing, or "making goods" -- though they did not know then were it would come from.

Now we DO know -- "IP and Services" -- we are an IP and Services Economy. All future moneys of any import will come from new IP and new services.

And these are things the USA, with its polyglot culture, RULES AT.

There is currently no -- repeat NO -- nation which can compete even vaguely with the USA/UK in the creation of IP for others to use and enjoy. And virtually none of them can compete with the USA in services.

This is because the polyglot USA is a compendium of world cultures.
If it plays well here, it plays well in a hell of a lot of other places.

So stop worrying about crap like manufacturing. Stop worrying about what the WTO decides. These are trending towards 5% of the economy and 2-5% of the labor force. Everyone else has to find work elsewhere -- just as the ag workers did a century ago. If you want to see the factory of the future, see the Lexus facility posited in the movie "Minority Report". Note the lack of human involvement.


So it ain't the WTO you should be circumspect about -- The ones you should be watching the actions of is WIPO.

 
At 7/09/2009 11:22 AM, Blogger Patrick said...

OBH,
I don't think its really fair to say we aren't a manufacturing nation.

http://www.epi.org/economic_snapshots/entry/webfeatures_snapshots_20080212/

10.1% direct support of total employment (2006)

12.2% of total GDP (2006)

As the article points out though, these figures don't account for the raw material and service industry inputs that are required. If you look at everything that is connected to mfg it still has a significant impact on the economy.

 
At 7/10/2009 11:21 AM, Anonymous Anonymous said...

Defending and protecting the Nation from both foreign and domestic enemies is the ONLY item Constitutionally required by the Federal Government to provide.

Perhaps if libertarians would stop doing dirty dealing with dictators, tyrants and totalitarian mad hatters who then use those profits to destroy our Nation then America would not need to spend as much defending ourselves.

Selling your cheap crap from China may bring dirty dealers a nice profit however in the end the price paid is too steep to even imagine.


One more point; the Entitlement Industrial Complex surpassed whatever crumbs are available to the Military Industrial Complex.

Kill off tax-funded Universities first, end tenure (the protected class should longer be protected from competition) and return to pluralism, this will end the indoctrination of Serfdom while repairing a wide range of problems.

 
At 7/10/2009 10:11 PM, Anonymous Anonymous said...

"This report only claims to be a Staff report with only one congress members name on it, Darrell Issa (CA-49).

I agree with the findings but someone not so inclined would hardly think these opinions authoritative."

Actually if you look at the members of the committee on oversight and government reform there are many democrats on the committee (more than repubs).

 
At 7/11/2009 11:02 AM, Blogger retire05 said...

$300 s.f. in SoCal? You have to be kidding me? You consider that a value?

In central Texas, new homes are selling for around $100 s.f. and existing homes are easily found for $85/90 s.f. No wonder California is bleeding. I am sure that wages are not 3x's that of central Texas while homes are.

We did not have a housing/boom bust although homes are selling a bit slower than they were.

Perhaps it is time for the elites in D.C. to cease this endless social engineering they base their next election on. It doesn't work and the unintendec consequences are always disasterous.

 
At 7/12/2009 10:04 PM, Anonymous Anonymous said...

This article seems to say something different than the topic in "Stronger Underwriting, Bigger Down Payments," explains the problems. Negative equity and increasing unemployment are the biggest culprits according to the chart. What article is more accurate? The one by the politician or the one by an economist?

 
At 7/13/2009 5:04 AM, Anonymous wolfwalker said...

"a 26-page report released yesterday by the U.S. House of Representatives Committee on Oversight and Government Reform"

No, it wasn't. My BS-meter went off within two paragraphs. No way was that report, with that phraseology, released by any committee dominated by Democrats.

And indeed, one web search showed it wasn't. The original of the report is here, on the website run by the Republican minority of the committee in question. It's not a committee report; it's a committee minority report, probably prepared by the minority as a dissent from some report written by the Dems and issued under the formal aegis of the committee. As such it's completely one-sided and intentionally biased. I strongly agree with its thesis that government policy was a large component of the housing bubble and subsequent meltdown ... but I would never cite this report as an objective study that supports my position. It is not.

 
At 7/13/2009 10:30 PM, Anonymous cbullitt said...

Outstanding. I haven't been by in a while...stupid of me. Nice to see the blame placed where it belongs by someone other than the voices out here in the hyperverse.
Too bad the sheeple will never learn about it.

 

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